Tag Archives: debt

Fixing the Ecomony #1

Open the Federal Reserve discount window to states and local government. This initiative uses no taxpayer money, requires no action from Congress, could be implemented immediately and should save state and local governments, as much as $80-$100 billion, each year while providing badly needed economic stimulus or tax relief. In DC, this would be spun, “a trillion dollar stimulus over ten years.”

We already give access to the Fed’s discount window to banks – even non-member foreign banks (yes, among many others, Gaddafi-controlled, Central Bank of Libya-owned, Arab Banking Corp.); Wall Street and insurers of Wall Street including Goldman-Sachs, Morgan Stanley and AIG; and pseudo-banks/auto lenders including GMAC. Why not allow access for our sovereign state governments that are bound by balanced budget amendments –  many of whom now have higher credit ratings than the US government?

Can we do that? Sure. The Federal Reserve has long held the authority to lend to anyone or anything during unusual and exigent circumstances – and the Fed defines the circumstances. Under the 2010 Dodd-Frank Act, the Fed’s authority of extending credit has been changed from “specific individuals, partnerships and corporations” to also give access to “any program or facility with broad-based eligibility.”* Further, the Fed has authority to buy state and municipal securities directly (known as: quantitative easing).

Even without the emergency authority or the expanded authority, states have long been able to simply set up publicly-owned banks** for the specific purpose of Fed discount window access.

The Fed currently lends money from .015% to 1.25%. States and local government now have more than $2.8 trillion in bond debt*** – used to build roads, hospital, schools and universities, football stadiums for NFL teams, the infrequent mass transit project (liberal areas, only), infrastructure projects, attract industry, and other purposes. The Center on Budget and Policy Priorities reports that these bonds cost 4-5% of annual expenditures and recently, typical rates are from 4%-6%.

The potential for fixing the economy, however, doesn’t stop there. Individual states would have authority to use its access to the Fed discount window to finance utility construction and lower costs for consumers (according to the AJC, those in Georgia who will be subject to a $9 a month financing charge for the expansion at Plant Vogtle are ideal beneficiaries). Each state could use lower rate access to provide businesses with capital to expand and create jobs, financing to consumers for environmental improvement, offer lower cost student loans to its citizens, financing for non-profits and a host of other initiatives.

Is it inflationary? Sure, but when growth is at 1%, no worries.

Does it compete with the private sector financing? Yes, but to consider that bad, one should consider that most private financing is done with access to the Fed window and one would also have to answer why taxpayers should pay more?

Will it take a chunk of most lusted-after income out of the pockets of the greedy “masters of the universe” Wall Street investment bankers and hedge funders? Sure, and wouldn’t that be great?

As a by-product, wouldn’t it increase state and federal tax revenues, since so many wealthy investors use municipal bonds to make tax free income? Yep.

Wouldn’t former mayors, council people, senators and legislators who go into the lucrative bond business leveraging their former patronage to call in favors have to find another way to fleece taxpayers after they get out of office? Yes, that, too.

Wouldn’t it help Democrats more than Republicans? I doubt it. The Fed is not political and there are an awful lot of Republican governors who’d jump at the chance to have a little more room in their budgets. Most of those helped would be in the jobs it would save and the new jobs that could be created – jobs regardless of party affiliation.

Author’s note: This is first in a series of commonsense things we can do to fix our economy during this time when the House and Senate can agree on nothing. I invite your comment and suggestions.

Update: The article was updated on 8/8/11 at 1:42 PM.

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* Whatever the hell this could possibly mean will eventually be known when Congress approves the 4,000 rules to govern implementation of this bill. Until then, it is anyone’s guess.

** “In North Dakota, the publicly owned Bank of North Dakota (BND) acts as a “mini-Fed” for the state. Like the Federal Reserve of the 1930s and 1940s, the BND makes loans to local businesses and participates in loans made by local banks. The BND has helped North Dakota escape the credit crisis. In 2009, when other states were teetering on bankruptcy, North Dakota sported the largest surplus it had ever had. Other states, prompted by their own budget crises to explore alternatives, are now looking to North Dakota for inspiration.” – ZeroHedge.com

*** General obligation bonds (GOs), Revenue bonds, Conduit bonds, Insured bonds, Original Issue Discount bonds, Taxable bonds, Zero coupon bonds, Pre-Refunded bonds, Escrowed-to-Maturity (ETM) bonds, Housing bonds, Municipal Notes. Current total outstanding is a very difficult figure to come up with. The figure of $2.8 trillion is from Wall Street investment company estimates. The US Census Bureau’s Statistical Abstract was last updated for state and local government debt in 2007 (totaling almost $2.5 trillion), but does not include many types of municipal debt. Dependent upon the purpose, these instruments may or may not be tax free.

Jubilee for the middle class

The American middle class is dying off in huge numbers. It has been going on for more than a decade, but we are facing a catastrophe of biblical proportions. I have a plan to stop it and to save those left.

Hyperbole? You decide.

Formerly known as the middle classWhen someone speaks for the middle class, most often they continue to use a post-World War II snapshot. Average salary. Average house. Average everything. Most Americans believe they are a member. Because of the enormous changes in concentration of wealth, they are wrong. More Americans than they realize are actually poor by prime time standards. More are joining them every day. But this piece is not about the poor.

Lcurve.com took the most recent census figures (it has gotten worse since then) and plotted it on a football field (sports metaphors are the best way to communicate complicated issues in terms that sound good, but seldom do more than confuse things further). If median income were used, the stack of money earned at the fifty yard line would equal a stack of $100 bills, 1.6 inches high (median household income ranging from $61,000 in Maryland to $31,000 in West Virginia  – 1.6  inches is about the size of your big toe, OK, a boy’s big toe). At the five yard line, the stack of $100 bills is 4″ high. At the one foot line, the stack of $100 bills is 40 inches tall, or 3-feet, 4 inches. At the one inch line, the stack is over 30 miles high.

The middle class now lives somewhere between the five and the ten yard line. At one time, and in my lifetime, they owned half the field.

There are many advocates for the poor – I am among them, but they can do without me for the day. Admittedly, the working poor are suffering something terrible and are too busy working three jobs to advocate for themselves and only have Joe Biden. The rich? They hire hire lobbyists. Today, I’m focusing on the middle class.  The faux alter ego of the rich… and the poor. The people who are portrayed on television commercials during prime time. Beautiful, healthy, making-it- in-America kind of people who bought in to the American work ethic, performed to it, and subsequently have more to lose and yet further to fall. They are the poster children for the American dream.

Formerly known as the middle classThese are the people who look as if they made it – good education, ambition, hard work and a couple of good decisions landed them with a good job and on a career path. They had the audacity of hope ten years ago. They bought into the ownership society. They believed. They purchased more home than they needed because they knew it would grow in value along with their wages. They had good credit and used it. They consumed and charged some of it on their single-digit-rate credit cards. They pay huge amounts of income, property and sales taxes. Buy or lease the new cars. Send their kids to private schools in new uniforms. And go out to dinner.

Where are they today? They are holding on by their nails (no longer professionally manicured). They are being squeezed to death. Those who didn’t get laid off are working longer hours, many for less pay. The raises and the bonuses, known as the big hits, didn’t happen as hoped and planned, unless they are on Wall Street.  The AMT (Alternative Minimum Tax) has hit them hard. Very hard, an annual battering. Their property taxes skyrocketed because they bought their houses before the prices fell, but after the reassessments. Some have extended families who are out of work or under-employed. They have had to help out. Their health insurance has gone up, along with their co-pays and their need for care. Their equity lines have been cut , and not-so-coincidentally, so too have their credit card limits. For the first time in modern history, consumers are paying against their credit card debt before paying their mortgage payments – a feeble attempt at false liquidity at the risk of the most basic of human needs – housing.

One by one, they were either a day late paying their credit card bill, or a dollar short on guessing their new lower credit limits. The late charge, or over-limit fee hit their Equifax report and their 3% Chase card with the $30,000 balance, and $35,000 credit limit overnight turned into a 33% card with a $30,000 limit. Their monthly payments went up by a thousand dollars and with it all their “disposable income.” Suddenly, all the other cards matched the 33% rate. They cut back immediately, but it wasn’t enough. They cashed out their retirement. Got rid of their extra car. Postponed their health needs. Then the collectors started calling. They never knew they were living on the edge. The precipice was looming.

I’m not making this up. Our middle class – those making $100,000 to $250,000 a year are suffocating – their financial livelihood is being squeezed out of them, and with it their contribution to consumerism. Almost all of the air is going to the bank (a euphemism for “the company store”). They have exhausted their savings, have no equity, no credit, less than zero leftover money, and are losing it. Sure, many have been able to hold on to that one nice car and that wonderful home with the for-sale sign in the front yard. But their “comfortable” life is only in the living room. Disposable income provides economic freedom – it is gone.

I realize that creating sympathy for those on the five yard line is almost impossible. These are the people that we all need to take us out of the recession. They are the customers of those who are still working. They are, or were , the employers of the working poor. These are the people who pay the taxes that keep our government working. Ironically, they are the only class who are still vaguely in touch with those on the one foot line, who otherwise, would (pick one or more: have no friends at all; no one to betray, or no one to aspire to them).

So, what’s my plan? My proposal? A middle class bail out that won’t cost the taxpayer a dime.
Premise: those who are already 30 to 90 days behind on their credit cards and owing the exorbitant interest rates are unlikely to make it. Fortunately for the banks, all of these accounts are insured… by AIG. Yes, the company that is 80+% owned by the US government. The insurance that banks have on these accounts returns 70-80% of the balance to them, which is why they add on all the late payments and hidden charges in order to jack up the balance prior to handing the debt to AIG. The banks get it all back and the government ends up picking up the tab.

I propose that we offer a deal to save those middle class patrons who can still be saved. A deal that won’t cost the taxpayers a penny. In return for cutting up their credit cards, getting no new ones, paying on time and not declaring bankruptcy, we (using the rates being charged to banks) would let them pay off their debt at near zero interest rate (the near zero will pay for the servicing). If they renege, the deal goes back to the bank to collect and they don’t get another chance.

For someone who has $100,000 in credit card debt, this will save them $25-$30,000 a year – about the same deal they had before this “greatest economic crisis since the great depression” began. Enough money to pay off their debt in a few years instead of never. To get their mortgage caught up and keep them in their home. Enough for them to get back soon to consuming, paying taxes and saving us all.

What about all that interest that’s being written off, is that a cost to someone? Only on paper. The government now lends money to banks for virtually nothing (it is why the banks have so much to gamble on Wall Street). The banks are charging exorbitant rates for credit cards, but their earnings are only on paper,  as much of it will never be collected. They justify these rates and charges because of the risk of default, but this isn’t new money or new risk. The only thing that changed was the economy. Why should we bail out the banks, give them free money for their bad decisions and not bail out the people, who – should they survive –  pay for the bank bailout? The banks do not deserve the spread and bankruptcy is bad for everyone (except the banks).

This solution is not another big government bailout (even the servicing can be privatized). It is simply extending, for a limited time, the rate we charge banks to a group who had the audacity of belief in the American dream and wants to pay their debt. They bear the costs, are responsible for their decisions, and will give us all a chance to get out of this mess.

One more note – this is fairly progressive. Credit card debt is relative. Credit card jubilee (at least in concept) could be just the thing to get us out of this mess.